Economics week four Elasticity Of Demand.

Elasticity of demand measures the degree of responsiveness of quantity demanded of a commodity to changes in price, income or price of related (other) commodities.

Types Of Elasticity Of Demand. There are three types of elasticity of demand which are: I.Price elasticity of demand. II.Income elasticity of demand. III.Cross elasticity of demand.

Types Of Elasticity Of Demand. There are three types of elasticity of demand which are: I.Price elasticity of demand. II.Income elasticity of demand. III.Cross elasticity of demand.

Price Elasticity of Demand. This measures the degree of responsiveness of the quality demanded of a commodity to a small charge. EP= % change in quantity demanded % change in price

Example 1: If the price of a commodity increased from #15 to #20 and the quantity bought decreased from 200kg to 150kg, determine the price elasticity of demand. EP= % change in quantity demanded % change in price

% in Qty DD= 200 – 150 × = 50 × 100 = 25% % in price = × 100 = % 15 1 EP= % change in quantity demanded = 25% % change in price 33.33% = 0.75

Example 2 Given the table below, calculate the price elasticity of demand. Price Jan 10 Feb 8 Quantity (kg) 40 48

EP= % change in quantity demanded % change in price % in Qty DD= 48 – 40 × × 100 = 20% 40 1 % in price = × 100 =20% 10 Therefore, = 20% = EP= 1 20%

Degrees Of Price Elasticity. Price elasticity of demand are of different varieties. These include. 1.Elastic demand (fairly elastic) : this occurs when the proportionate change in quantity demanded is greater than the proportionate change in price. The coefficient (numerical value ) of elasticity is greater than 1.

price p1 p0 0 q1 q0 D D Ep >1

Inelastic Demand (fairly inelastic demand) This happens when the proportionate change in quantity demanded is less than the proportionate change in prove. The numerical value of elasticity is less than 1

p1 p0 0 q1 q0 D D Ep<1

Unitary elastic demand This happen when a given change in price leads to the same proportionate change in quantity demanded. The coefficient of elasticity is 1

price p0 p1 q1q0 d d o Ep = 1

Perfectly infinitely elastic demand. This occurs when a given change in price leads to an infinitely large charge in quantity demanded.. For instance, a very increase in the price causes the quantity demanded to fall to zero. The numerical value is infinity.

pD quantity o Ep = ∞

Perfectly inelastic demand /zero elasticity. The numerical value is zero. The quantity demanded remains the same irrespective of any change (rise or fall) in price.

p1 p0 q o

Assignment Define  Elasticity of demand  Price elasticity of demand  State any four determinants of price elasticity of demand  Draw curves illustrating I.Fairly elastic demand; II.Perfectly inelastic demand.